What do propane and politics have in common? One smells bad, the other is used to heat hot water and provide heat for your home in winter.
Very funny, we know! But they have something else in common as well. Both illustrate the beauty of competition. I received a marketing call from a well-known propane distributor (we’ll call them AmeriPropane) asking me if I needed to fill up my tank. And how timely! As the Starks of Winterfell say, “Winter is Coming!”
AmeriPropane’s business model (I assume) is to give away free gas tanks to commercial developers and home builders in exchange for licensing them to the eventual building occupant. Once licensed, the state government, in my case Virginia, protects the interest of AmeriPropane by outlawing the purchase of propane from any other distributor. Virginia considers filling a propane tank by anyone other than the owner to be a Class 3 misdemeanor.
And abracadabra! A tiny monopoly is formed for my individual propane market. I don’t own the propane tank buried beneath my yard, and I have to accept AmeriPropane as my sole-source provider of much needed heating fuel for the winter months.
As you can imagine, AmeriPropane has zero incentive at this point to provide any discount that might be confused with competitive pricing from other propane distributors.
To be sure, when I called to get a price for a refill, a very apologetic sales representative quoted me a price of $3.58 per gallon of fuel. Two competitors also servicing the area quoted prices of $2.29 and $2.19. (If it doesn’t sound like much, tank sizes average 500 to 1,000 gallons.)
AmeriPropane: $3.58 x 500 = $1,790
Competitor 1: $2.29 x 500 = $1,145
Competitor 2: $2.19 x 500 = $1,095
Propane is an differentiable commodity. Different competitors essentially provide the same C3H8 molecules. Assuming all companies are honest and provide the same propane (in this case they do), then using the lowest bid generates a savings of $695. At every fill-up. With as many as 2 fill ups during the winter depending on how low temperatures go and how vocal complaints from my wife are as to the thermostat setting.
AmeriPropane isn’t “wrong” or “criminal” or “exploitative” in charging the prices they do. Tanks cost money as does maintenance and installation. Politicians and progressives believe in free lunches. For the rest of us who live in the real world, the TANSTAAFL principle is an iron clad reality.
In this situation, the only way to win the pricing game was to alter the market and set myself up as the tank owner. I purchased my tank for $1,070, which the math above proves was easily paid for in less than 2 fill-ups.
Now I am the tank owner, and the monopoly for propane fill ups is no more. Free market competition – or at least an approximation of it with a market of about 5 local providers vying for business – is the new paradigm.
As an aside, Competitor 2 showed up, filled my tank and left me a swag bag filled with magnets, bag clips, and even a bag of chips to show appreciation for my business. None of which I ever received from AmeriPropane.
Since becoming the owner of the tank, I routinely call around for propane pricing – and am sure to ask my former tank owner for a price, “just to see” how much I’d be saving from my tank purchase. If they were a low bidder, of course they would get the fill up order. AmeriPropane is consistently 50 cents per gallon higher or more from the average price of the other companies.
Now back to where the story began – with the curious calls from my former tank owner. It seems they have started a marketing program to reach out to previous tank owners and offer competitive pricing on propane fill ups. Imagine that! Somehow they’ve reached the conclusion that selling propane at less of a profit is a better outcome than having propane sit in a storage tank at their distribution center.
I recently filled my tank this summer for $1.49. AmeriPropane had offered $1.99. (Yes even when I identified myself as the tank owner – no discount!) But this time, they wanted to offer me $1.45. They would have actually been the lowest bidder – if they had gotten to me a few weeks earlier.
So if you’re still with me, you’re probably saying, “The point, man! Get to the point, man!” Talk of free markets, tormenting you with math, resurrecting dreaded economics terms, it’s all too much! The point is simple: free market competition generally produces a superior result than non-free market competition. AmeriPropane quickly learned and even adapted their behavior when stockpiles of gas went unsold at what many would consider ridiculously high prices.
And the more competitors the better. Consumer choice is a key ingredient in any healthy market. Bernie Sanders may not think being able to choose from 23 types of deodorant or 18 types of sneakers is a good thing, but the reality is that healthy competition keeps prices low and quality high, which enables consumers – particularly those with less disposable income who Bernie purports to “help” – to buy more of the things they need.
Suppose there were only 2 producers of deodorant. The inevitable result would be less competition. Higher prices, lower quality, and less responsiveness to consumer demand would quickly follow.
Which brings me to the final point of this post. If we accept that competition is good – that it forces competitors to stay responsive and ultimately produces a superior result than having a market with only one or two competitors, then what does that say about our two-party political system?
The current two-party system leaves many people with only one choice and potentially no voice given a particular set of views. Despite all the evidence to the contrary for the failure of government managed programs (e.g., bankrupt Social Security, rampant Medicare/Medicaid fraud, failing schools despite record per pupil investment, the US Post Office, Amtrak, healthcare.gov, Cash for Clunkers, Prohibition, War on Drugs, Immigration Reform, Farm Subsidies, Affordable Care Act, Ethanol, “Green” Jobs frauds, Consumer Finance Protection Bureau, to name only a few…), if you like big government, then Democrats are generally your only choice. Conversely if you don’t like big government, then Republicans might seem like the only choice – except many of them lately behave like Democrats. This is a duopoly. And in duopolies, while things for consumers aren’t as bad as a monopoly, they aren’t much better.
Voter appetites for more choices are becoming crystal clear with the surges in popularity of Bernie Sanders and Donald Trump – both of whom are bucking the “establishment” of their respective parties.
So when it comes to our political system, isn’t it time to rethink only having two competitors to choose from?